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TERRIFIC PROMOTIONS, INC. v. DOLLAR TREE STORES

November 26, 1996

Terrific Promotions, Inc., Pamela J. Alper, and Michael N. Alper, Plaintiffs,
v.
Dollar Tree Stores, Inc., and Timothy J. Avers, Defendants.



The opinion of the court was delivered by: LINDBERG

MEMORANDUM OPINION AND ORDER

 Plaintiff Terrific Promotions, Inc., a Delaware corporation ("TPI-DE"), and its owners Michael and Pamela Alper ("the Alpers") bring this action alleging that defendant Dollar Tree Stores ("DTS") violated Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78(j)(b), and Rule 10b-5, 17 C.F.R. § 240.10b-5 (1996), by fraudulently inducing the Alpers to sell Terrific Promotions, Inc., an Illinois corporation ("TPI-IL"), to DTS; that DTS and Timothy Avers, the former manager of wholesale operations at TPI-IL, conspired to harm competition in the national wholesale merchandising market in violation of Section 1 of the Sherman Act, 15 U.S.C. § 1; and that DTS and Avers made fraudulent misrepresentations, breached their confidentiality and non-competition agreements, perpetuated a civil conspiracy, engaged in unfair competition, misappropriated confidential business information, and breached fiduciary duties all in violation of Illinois state law. Defendants DTS and Avers have moved the court to dismiss the action pursuant to Fed. R. Civ. P. 12(b)(6), and, for the reasons set forth below, their motions to dismiss will be granted.

 CONTROLLING LEGAL STANDARD

 The court may grant a motion to dismiss pursuant to Fed. R. Civ. P. 12(b)(6) "only if it appears beyond doubt that the plaintiff can prove no set of facts in support of its claim that would entitle it to relief." Conley v. Gibson, 355 U.S. 41, 45-46, 2 L. Ed. 2d 80, 78 S. Ct. 99 (1957). When reviewing a motion to dismiss, the court must take every well-pleaded allegation in the complaint as true and make all reasonable inferences in favor of the plaintiff. Oswalt v. Godinez, 894 F. Supp. 1181, 1184 (N.D. Ill. 1995) (citation omitted). The following recitation of facts is set forth in conformity with this standard and is therefore adopted solely for purposes of the motion to dismiss.

 FACTUAL BACKGROUND

 In 1986, plaintiffs Michael and Pamela Alper launched TPI-IL with a single retail shop selling a variety of low-priced consumer goods, and within ten years the company had grown into a national chain of 136 "Dollar Bills" stores. In 1993, the Alpers decided to expand their company to include a wholesale merchandising business. A wholesale merchandiser is one who purchases consumer goods directly from various manufacturers, generally at some below-wholesale discount rate, and then resells those goods to wholesalers at prices that are higher than what the wholesale merchandiser paid but lower than what the wholesaler usually pays. Unlike a retailing operation, the essence of a successful wholesale merchandising business consists in "confidential and proprietary information relating to sources of supply, distribution channels, customer base, pricing and timing factors, and other relationships central to their business." 2d Am. Compl., P 12. Despite the functional difference between the wholesale merchandising and retail operations of TPI-IL, however, both elements of the corporation were represented by a single class of common stock and were therefore legally indistinct.

 In July of 1993, the Alpers hired defendant Timothy Avers to head up their wholesale merchandising business. As a condition of his employment, Avers signed an agreement ("Avers Agreement") that contained both a confidentiality and non-competition clause. In relevant part, the confidentiality clause provided that

 
during my employment and after the termination thereof for whatever reason, I shall hold and keep secret the Proprietary Information as to which I at any time during my employment shall become informed, and I shall not directly or indirectly disclose any such information to any person, firm, governmental agency, corporation, partnership or any other entity or use the same except in connection with the business and affairs of the Company.

 Avers Agreement, P 3. The non-competition clause provided that Avers would not compete with either the retail or wholesale merchandising operations of TPI-IL within a radius of seventy-five miles of an existing TPI-IL store and for a period of two years following the termination of his employment with that company. Avers Agreement, P 4.

 The Alpers personally owned of all of the capital stock in TPI-IL, and in September of 1995 they entered into negotiations to sell all or part of the company to defendant DTS. Pursuant to these negotiations, the Alpers entered into a confidentiality agreement with DTS on October 5, 1995 ("DTS Agreement"). The agreement provided that DTS would maintain the confidentiality of any TPI-IL business information that it received in connection with the purchase negotiations. DTS Agreement, P 1. The agreement further provided that, for a period of two years beginning on October 5, 1995, DTS would not "initiate or maintain contact with ... any officer, director or employee of [TPI-IL] ... regarding, directly or indirectly, the business operations, prospects or finances of the Company" and that it would not "directly or indirectly solicit the employment of, or employ such officer, director or employee, except with the express written permission of [TPI-IL]." DTS Agreement, P 8.

 As a result of these negotiations, during which both TPI-IL and DTS were represented by legal counsel, the parties signed an Agreement for the Purchase and Sale of Stock on January 16, 1996 ("Stock Purchase Agreement"). In this agreement, the Alpers contracted to sell all of their stock in TPI-IL to DTS for a price of $ 53,345,000. Stock Purchase Agreement, Arts. 1, 2.1.1. Notably, the agreement provided that the "understandings, representations and/or covenants" contained in the DTS Agreement would "terminate and be of no further effect or force" upon the closing of the transaction. Id. at Art. 7.10. The transaction was closed on January 31, 1996.

 In reliance on these representations, the Alpers incorporated TPI-DE on January 30, 1996, one day before the closing of the stock sale, as a vehicle for continuing their wholesale merchandising business. Their plan never came to fruition. Plaintiffs believe that at some point between the public announcement of the stock sale on January 16, 1996, and the closing of the transaction on January 31, 1996, Avers secretly agreed to work for DTS and disclosed proprietary business information to that company about TPI-IL's wholesale merchandising business. Thus, immediately after closing the stock transaction, the Alpers found themselves deprived of the key personnel and confidential information necessary to operate TPI-DE as a profitable wholesale merchandising firm.

 The Alpers advance numerous legal claims in their bid to recover their wholesale merchandising business. In Count I, they allege that the stock sale harmed competition in violation of the Sherman Act, 15 U.S.C. § 1 et seq., by reducing the number of competitors in the national wholesale merchandising market. In Count II, they allege that DTS fraudulently induced them to sell their stock by misrepresenting that they would be able to retain the wholesale merchandising business, all in violation of Section 10(b) of the Securities Exchange Act, 15 U.S.C. § 78(j)(b), and Rule 10b-5. In Counts III through XIII, all of which are based on state law, the Alpers allege that DTS and Avers made fraudulent misrepresentations, breached their confidentiality and non-competition agreements, perpetuated a civil conspiracy, engaged in unfair competition, misappropriated confidential business information, and breached various fiduciary duties. Plaintiffs seek actual, compensatory, consequential and punitive damages of not less than $ 10,000,000; treble damages pursuant to 15 U.S.C. § 15; an ...


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